Vendor Distressed Property Sale
Identifying and exploiting intrinsic value means:
• Finding under-valued or under-utilised assets
• Gaining control of those assets at today’s market value or below
• Improving the value of the assets to a more realistic level (if necessary)
• On-selling them.
One of the key sources of under-valued property is vendor distressed sales. While you can be sympathetic towards a vendor who is selling under stressful circumstances, there is an opportunity for wealth creation in buying a property under market value and on-selling, perhaps without anything needing to be done to the property at all.
Let’s look at the these kinds of sales, and some of the reasons people might sell a property under-valued.
Marriage or partnership break-up
Often one of the partners is making an emotional decision and wants to sell quickly. I have bought a few properties where agents have contacted me saying that one of the partners in a marriage ‘just wants out’ and is willing to sell – perhaps 20 percent below market value – just to secure a quick sale so that they can get on with their lives.
Also, in cases where both partners are on the title deed and one partner isn’t making mortgage repayments, the other may be happy to sell at a discounted price in order to recover what they are losing by continually making mortgage repayments on behalf of their spouse. The same opportunities may occur in the break-up of a business partnership which jointly owns commercial premises such as a medical center or retail outlet.
Ill health and bereavement
When people have accidents at home or suffer ill health, often their reaction is to feel that they need to sell their property quickly. This is especially true with elderly couples. When one partner dies, the other will sell and move into a retirement village without worrying too much about realising the market value. They often prefer a quick, ‘quiet’ sale so they can avoid the processes of marketing and an auction.
Mortgagee in possession
When banks or mortgagees take possession of a property, they are obliged to auction it or send it to public tender. Some will want to speed up the process and will go to auction within 30 days – and some, depending on how the account has been handled, are happy to take their losses and move on. I have bought a couple of properties this way – one for half the value of the bank debt!
You wouldn’t believe how many people who have one-off tenant problems (whether in a residential or commercial property) make emotional decisions to sell their properties. I once bought a house that the tenants had absolutely trashed. The vendors didn’t even want to visit the property and they certainly didn’t want to spend any more money on it. I bought it at 30 percent under market value – but it was a simple clean-up job! I could have sold two days later at a $30,000–40,000 profit, simply because the landlord had a knee-jerk reaction to a bad experience.
Needs money spent
When you see an old, tired property for sale or lease – one that obviously needs money spent on it – there’s a good chance that you have a motivated vendor. I once inspected a large acreage site with grass growing up to my waist. I asked the agent whether the vendor was going to spend money on it. He said the vendor was a non-resident living overseas, who really didn’t want to spend any more money on the property. Since other purchasers were put off by their inability to inspect the property ‘properly’, I was able to purchase it for a fraction of its real value.
When trustees sell a deceased estate, they will often let it go at auction or put it to tender. If it’s more complicated than just a residential property, or the trustees have multiple properties in hand, they’re often prepared to be a little more creative with contracts. I once bought a property from the beneficiaries of a deceased estate and signed a contract to purchase it at $1.75 million, subject to obtaining council approvals. I then renegotiated with the deceased estate nine months later as I still hadn’t received council approval, but they were pushing to complete the sale. I agreed to an unconditional sale provided they give me a further $500,000 discount – which they did. I was able to sell the property only nine months later for $4.1 million!
When a local business folds, there’s an opportunity to acquire the premises at below market value. You’ll need to find a tenant to justify a high rental value for valuation purposes when financing the deal but you can think about this in advance. A good sign that such an opportunity might be in the offing is to keep an eye on the competition in the area: increases in competition can put sufficient stress on a business to make it fold or move.